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Given the situation below, can someone help me identify/name the logical phenomenon?

So I own a laptop that I don’t use…. Someone has offered me £1000 dollars for it but I decided not to sell it. I myself would NOT pay £1000 dollars for it… I feel like there’s some kind of illogical behaviour going on here because me not selling it for £1000 is financially equivalent to me buying it for $1000. I think in both cases I’m giving up £1000 for a laptop. Do you guys know if there a word/name for this?

Giskard
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Anthony Phan
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2 Answers2

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The discrepancy between WTP and WTA is known as the endowment effect, and this has been extensively studied in behavioral economics.

Herr K.
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  • This is not correct. The endowment effect is merely one possible explanation for any WTP-WTA gap. –  Sep 24 '20 at 00:50
  • @KennyLJ: The endowment effect is an effect, an empirical regularity, not an explanation of something else. Rather the endowment effect itself is to be explained because of its anomalous nature. The terminology is standard in behavioral and experimental economics literature. – Herr K. Sep 24 '20 at 02:03
  • See for example Brown (2005), Section 2, which lists the endowment effect as merely one of five "Plausible reasons for the disparity". –  Sep 24 '20 at 02:16
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    @KennyLJ: Perhaps we ought to refer back to the author who first coined and then popularized the term endowment effect: Thaler et al. (1991) use the term to refer to "the fact that people often demand much more to give up an object than they would be willing to pay to acquire it". This description as well as the wine example given in that paper closely resembles OP's laptop example. The JEP paper also explicitly says that endowment effect "can be explained by a notion of loss aversion" (p.199). – Herr K. Sep 24 '20 at 05:47
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    Dhami (2016), a textbook that is arguably the counterpart of MWG for the field of behavioral economics, has a subsection (3.2) devoted to outlining how loss aversion causes the endowment effect, rather than the other way around. The same direction of explanation can also be found in Ericson & Duster (2014, NBER WP). – Herr K. Sep 24 '20 at 06:16
  • You have fixated on the terms "loss aversion" and "endowment effect". I have not mentioned "loss aversion" once. The possibly observed empirical phenomenon is the "WTP-WTA gap". Possible explanations of this gap are "loss aversion" and the "endowment effect". The WTP-WTA gap was already discussed long before the term "endowment effect" was ever coined. It corresponds to the older "controversy" about the CV-EV gap. The traditional explanation for this gap was the income effect--this is included as one of Brown's (2005) five "Plausible reasons for the disparity". –  Sep 24 '20 at 07:21
  • Willig (1976) resolved the "controversy" by showing that this gap should, in theory, be small. From the 1980s, Knetsch, Thaler, et al. then conducted experiments showing that this gap may in practice be large. They then coined the term "endowment effect" as a possible explanation. It remains the most attractive explanation for the observed large WTP-WTA gaps. This is why some, like you, confusedly identify the "WTP-WTA gap" with the "endowment effect". –  Sep 24 '20 at 07:22
  • See also Hicks (1956, p. 177): If the income effect ... is not small, we do not merely get a significant divergence between the Marshall definition and the Marshall measure ... we now need to distinguish between a ticket which entitles him to buy the exact quantities which he would have bought if he had not had to pay for his ticket, and one which allows him to purchase any quantity he likes. ... We have further to distinguish from these the money which he would accept for the one sort of ticket or the other, if he had been given it free, and was to be persuaded to return it. –  Sep 24 '20 at 07:31

  • You have fixated on the terms "loss aversion" and "endowment effect". << Personally I find this rude. >> I have not mentioned "loss aversion" once. << So? No one is claiming you did. >> The WTP-WTA gap was already discussed long before the term "endowment effect" was ever coined. It corresponds to the older "controversy" about the CV-EV gap. << Citation needed. How about you greatly expand on your own answer with these claims (and references) thereby making it a great one?

     – Giskard Sep 24 '20 at 07:53
  • Also, the term "endowment effect" was introduced by Thaler (1980): "Henceforth, I will refer to the underweighting of opportunity costs as the endowment effect." –  Sep 24 '20 at 08:19
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WTP-WTA gap/discrepancy/disparity. (WTP = Willingness-to-pay, WTA = Willingness-to-accept.)

(There's a fairly large literature on this. Search "WTA WTP" on Google or Google Scholar and you'll find many papers.)